Moral hazard in the British bovine tuberculosis control programme

Abstract

Animal disease indemnity payments create a moral hazard problem by diminishing the financial burden of on-farm infection which, in turn, can reduce private incentives to invest in biosecurity. The economic importance of the moral hazard problem is a function of the size of the indemnity payment relative to market prices and input costs, as well as farm-specific disease risks and the probability that biosecurity efforts can reduce those risks. We investigate the importance of these contributory factors on disease outcomes in the context of the British bovine tuberculosis control programme using longitudinal herd-level data for all beef cattle herds in Great Britain. We show that, by disincentivising biosecurity investment, increases in disease indemnity payments lead to more on-farm breakdowns, increase the number of on-farm disease reactors and extend the duration of infection. Our findings suggest that the disease burden created through these unintended consequences accounts for approximately one-fourth of the additional programme outlays associated with a 10% increase in the per-head indemnity payment.